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Flashcards in Chapter 20 Deck (62):
1

Pam's building has 4 apartments with a market value of $500/ month. One apartment is vacant. The laundry machines make $1000/ year. What is the potential gross income?

$24,000

4 apts x $500 x 12 months
(vacancy + laundry = irrelevant)

2

What is the maximum rental income a building would make if all units were rented at full market value with no vacancy and no collection loss?

Potential Gross Income

3

What is potential gross income?

The maximum rental income a building would make if all units were rented at full market value with no vacancy and no collection loss

4

What is HO4?

Home Owner's Insurance-> Renter's Insurance

5

What does the Office of Receiver of Tax do?

Collect tax

6

What is not necessary for a contract?
a- capacity
b- competence
c- agreement
d- written form

D. Written

Capacity refers to the legal age (18+); Competence refers to being of sound mind; An agreement is a contract.

7

Do contracts have to be written?

No

8

What is the most liquid?
a- real estate
b- stocks
c- art
d- cars

B. Stocks (easily liquified)

9

What does OPM mean and what does it stand for?

Other People's Money; Leverage

10

What is a document predicting future financial performance of a building?

Pro forma

11

What is pro forma?

A document predicting future financial performance of a building

12

What is a planning tool for buildings future performance?

Pro forma

13

What document would a buyer prepare to predict a build's finances?

Pro form

14

What is:

Potential Gross Income
- Vacancy & collection loss
+ Other non-rental income (laundry, etc)?

Effective Gross Income

15

What is effective gross income?

Potential Gross Income - Vacancy & Collection Loss + Other non-rental Income

16

What is:

Effective Gross Income
- Expenses:
-- Real Estate tax
-- Insurance
-- Payroll
-- Utilities
-- Reserve fund
-- Management fee
-- etc?

Net Operating Income

17

What is Net Operating Income?

Effective gross income - expenses (fixed & variable)

18

What does NOI stand for?

Net Operating Income

19

What is the difference between fixed and variable expenses in relation to the operating statement?

Fixed include things that do not change (real estate tax, insurance) vs variables, which do change (payroll, utilities, reserve fund, management fees, etc)

20

What is the Operating Statement?

A document which shows the Potential Gross Income, Vacancies & Collection Losses, Non-rentable Income -> Effective Gross Income, Fixed & Variable Expenses --> Net Operating Income

21

Sam's building has $7500/ month income and $45,000/ year expenses. Pam will buy it if she can get 12% rate of return. How much should Pam pay?

$375,000

$7500 x 12 months= 90,000 Effective Gross Income

90,000 - 45,000 Expenses= $45,000 NOI

$45,000 / 12%= 375,000

22

A building sold for $600,000 at 12% rate of return. What was the income?

$72,000

$600,000 x 12%

23

What is IRV and what are the 3 methods to determine it?

Interest = Rate x Value
Rate= Interest/ Value
Value= Interest/Rate

24

What are expenses that are the same regardless if the building is full or empty?

Fixed

25

What expenses depend on occupancy? For instance the water bill will change.

Variable

26

What is the reserve fund?

Rainy day fund set aside by manager in the event of an emergency.
Usually 5% of effective gross income
Often required by a bank
If representing a buyer, buyer's lawyer will prefer to see this to protect the client

27

What is a fund set aside in the event of an emergency, often 5% of the effective gross income?

Reserve fund

28

What is typically paid flat fee or percentage based off gross income and treated like an expense?

Manager fee

29

What is the most important number for a building that people will often ask for over the price of the building?

NOI

30

What is the potential gross income - vacancy & collection loss + other non-rental income?

effective gross income

31

How is NOI determined?

Effective Gross Income - Expenses = NOI

32

I/R=V stands for?

(Dollar amount of income) / (Rate of Return)= (Dollar amount of value)

33

With IRV, what is factual and what is an opinion?

Income is a fact based upon tax returns
Rate of Return + Value are opinions

34

What are the 3 documents to send to potential commercial investors?

- Operating Statement
- Rent Roll
- Pro Forma

35

When do you use IRV?

To determine the value of a building

36

What is Capitalization Rate? (Cap Rate)

Rate of return investors are getting in a certain market for a certain product
(Market rate of return as a whole. Consider the example of someone's sneakers- you know they are more than $2 but less $20,000)
Market -> Capitalization

37

What is the rate of return investors are getting in a certain market for a certain product?

Capitalization Rate (Cap Rate)
Market -> Cap Rate

38

What are some good ways to develop market knowledge to help determine Cap Rate?

- Real Deal, WSJ, 1010 wins
- Ask peers, broker students, etc.

39

What is a factor not covered by NOI and why?

Mortgage Debt Service. It is personal and not universal.

40

How do you determine "Before Tax Cash Flow"?

NOI - mortgage debt service= Before Tax Cash Flow

41

How do you determine "Final Cash Flow Income"

Before Tax Cash Flow (NOI- mortgage debt service)= Final Cash Flow Income

42

What are 2 factors that determine mortgage debt service?

principal and interest

43

Sam wants to buy a building for $2,000,000. Income is $15,000/ month. Down payment is $500,000. If Sam buys it, what is his cash-on-cash return?

36%

$15,000 x 12 months= 180,000
$180,000/ $500,000 down payment= 36%

(2 mil irrelevant)

44

How do you determine Cash-on-Cash return?

Income / Down Payment= Cash on Cash Return

45

What is Income/ Down Payment?

Cash-on Cash Return

46

Between interest and principal, which one goes up and which one goes down?

Interest= down
Principal= up

47

Mortgage balance is $150,000 at 6% interest. What is this month's dollar amount of interest?

$750

($150,000 x 6%)/ 12 months= $750

48

What is a decrease in value?

Depreciation

49

What are the two types of Depreciation?

Economic
Tax

50

What is "depreciation"?

A decrease in value

51

What are the 3 reasons for Economic Depreciation?

Physical
Functional Obsolescence
External Obsolescence

52

What is called when something works but doesn't meet modern standards by being either old or inappropriate, and what is an example?

Functionally Obsolete/ Functional Obsolescence

Old elevators

53

If the air-conditioner works but doesn't meet modern tenant standards, what is it called?

Functionally Obsolete/ Functional Obsolescence

54

What does it mean when something is inappropriately functionally obsolete?

It is not appropriate for the neighborhood (opened a palace in a poor neighborhood would cause the real estate to lose value - the property would be more valuable in the Hamptons)

55

What is it called when something is inappropriate outside of the building?

External Obsolescence

56

What is an example of a tax shelter?

Depreciation allowance

57

How long does the government attribute a life span for both an apartment and a commercial property?

27.5 years; 39 years

58

What is depreciation allowance an example of?

Tax Shelter

59

What is the amount the landlord can annually deduct of the building's value from the building's income?

1/27.5th or 3.636%

60

What are two things that cannot depreciate?

Land
Non-income real estate

61

If a building's value is 1 million dollars, what is the tax deduction, and does this deduction value change over time?

$36,360
No; if you bought it for $1 million value will always be $1 million regarding the tax deduction.

62

A property is worth $200,000 of which $30,000 is land. It has 10 apartments renting for $580/ month. What is the annual depreciation deduction?

$6182.

$200,000- $30,000 land value= $170,000 for building
APT= 27.5 years

$170,000 / 27.5 = $6182
OR
3.636% x $170,000=$6182

Amount of apts & rent/month irrelevant bc it asked for deduction not income nor tax